Budget Trading Program Research Articles

Environmental Regulation and Access to Credit

AbstractWe show that climate priorities codified in regulations significantly impact firms’ access to credit, especially long‐term credit, an important financial resource required for achieving business viability and sustainability goals. Following the implementation of a prominent cap‐and‐trade programme aimed at controlling nitrogen oxides (NOx) in the United States (the NOx Budget Trading Program, NBP), manufacturers experienced decreased debt maturity structures, driven by reduced access to long‐maturity debt, but did not alter their use of short‐term debt or trade credit. The NBP's effect on long‐term credit is more pronounced for firms with higher degrees of electricity intensity, financial constraints, information frictions or rollover risk. It ultimately led to deteriorating firm value and operating performance. Increased energy costs and elevated operating leverage explain firms’ reduced access to long‐term credit. Our findings highlight the potential unintended consequences of policy instruments designed to boost a specific aspect of sustainability and the complex nature of managing corporate financial and sustainability goals.

Air pollution-induced brain drain: Evidence from inventor mobility

This study attempts to examine the impact of air pollution on inventor mobility. Specifically, we find that the number of polluting facilities surrounding inventors' workplaces significantly affects their mobility. To establish causality, we introduce the NOx Budget Trading Program of 2003 as an exogenous shock and find consistent results. We further demonstrate that the air pollution drives inventors to relocate to areas with better air quality. We present several economic mechanisms underlying our findings, including inventors' career concerns, knowledge generality, and knowledge complementarity. Finally, we show that the net outflow of inventors negatively affects firms' innovation outputs.

Strategic working capital management in response to a performance shock: evidence from the NOx Budget Trading Program

PurposeThis paper examines how manufacturing firms impacted by the nitrogen oxides (NOx) Budget Trading Program (NBP) strategically managed working capital to release funds for increased costs and mitigate the negative impact on firm performance.Design/methodology/approachThe study uses a panel data set including 11,302 manufacturing firm-year observations listed on the US exchanges during the period 2000–2008. The authors use Tobin's Q to proxy for firm performance, and cash holding, cash conversion cycle (CCC), days sales outstanding (DSO), days sales inventory (DSI) and days payable outstanding (DPO) for working capital management (WCM). The empirical analysis is conducted using both ordinary least squares (OLS) and propensity score matching (PSM) regressions.FindingsThe authors find that firms respond to the higher utility costs imposed by the NBP by decreasing CCC, DSO and DSI. This active WCM response partially mitigated the impact of increased compliance costs on performance for firms affected by the NBP. Results are robust in PSM regressions.Research limitations/implicationsClimate change is a global issue that has attracted increasing attention in recent years. This study shows how firms can adjust short-term financing strategies to address the costs of compliance with climate change regulation.Originality/valueThe paper contributes to the emerging literature on corporate finance and climate policy actions. The authors use the unique experimental setting of the NBP to examine the regulatory impact on corporate financial management. The authors demonstrate how firms used active WCM to mitigate the negative performance impact of regulatory compliance with the NBP, providing novel insight on the implication of compliance with climate change legislation.

Climate Policy Risk and Corporate Financial Decisions: Evidence from the NOx Budget Trading Program

We find that manufacturing firms adopt more conservative capital structures in response to the Nitrogen Oxides (NOx) Budget Trading Program (NBP) of 2004, a regional cap-and-trade program aimed at mitigating the NOx emissions of power plants in 11 midwestern and southeastern states in the United States. Our further analysis demonstrates that, because the NBP induces an electricity price shock, it affects manufacturers’ financial decisions by raising their operating leverage and distress risk. We also find that firms respond to the NBP’s adoption heterogeneously: they adjust their financial leverage more dramatically when facing greater electricity intensity, financial distress threats, or competitive pressure. In addition, firms adapt not only capital structure, but also other financial policies in response to the regulation. Overall, our study shows that climate policy risk constitutes an essential consideration in firm financial decisions. It also highlights potential unintended consequences of policy responses to climate change for the corporate sector. This paper was accepted by George Serafeim, Special Section of Management Science on Business and Climate Change. Funding: The authors gratefully acknowledge generous financial support from the Alliance Manchester Business School Strategic Research Investment Fund. Supplemental Material: The data files and online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4617 .

The Unintended Externalities of an Environmental Regulation: Evidence from the NOx Budget Trading Program

The Unintended Externalities of an Environmental Regulation: Evidence from the NOx Budget Trading Program

Does Reducing Air Pollution Make Inventors More Innovative? Evidence from the NOx Budget Program

Using the NOx budget trading program (NBP) as a quasi-natural experiment, we examine whether a reduction in air pollution enhances inventor risk-taking, thus making inventors more innovative. We find that inventors located in NBP participating states produce more patents after the introduction of the NBP. These patents also receive more forward citations and have higher economic value. The effect of the NBP is larger for less experienced inventors and inventors living in high-pollution areas. Further, inventors located in NBP participating states engage more in experimental innovation and less in specialization innovation after the NBP, which confirms the risk-taking channel.

The effect of air pollution on criminal activities: Evidence from the NOx Budget Trading Program

This paper examines the impacts of air pollution on criminal activities by exploiting three dimensions of variations observed under a rich quasi-experiment: the NOx Budget Trading Program. This program has been well documented to decrease air pollution concentrations in participating states. Employing a triple-difference estimator, we find evidence showing that the program significantly reduced violent and property crimes in participating states by roughly 3.7% and 2.9%, respectively. Instrumental variable estimates suggest that lowering air pollution may play an important role in reducing criminal behaviors.

Climate Policy Risk and Corporate Capital Structure: Evidence from the NOx Budget Trading Program

We find that manufacturing firms adopt more conservative capital structures in response to the NOx Budget Trading Program (NBP) of 2004, a regional cap-and-trade program aimed at mitigating the NOx emissions of power plants in 11 midwestern and southeastern states in the United States. Our further analysis demonstrates that, because the NBP induces an electricity price shock, it affects manufacturers’ financial decisions by raising their operating leverage and distress risk. We also find that firms respond to the NBP’s adoption heterogeneously: they adjust their financial leverage more dramatically when facing greater electricity intensity, financial-distress threats, or competitive pressure. In addition, firms adapt not only capital structure but also other financial policies in response to the regulation. Overall, our study shows that climate policy risk constitutes an essential consideration in firm financial decisions. It also highlights potential unintended consequences of policy responses to climate change for the corporate sector.

Environmental regulation as a double-edged sword for housing markets: Evidence from the NOx Budget Trading Program

We investigate the effects of environmental regulations on housing markets using a quasi-experimental setting—the NOx Budget Trading Program (NBP). Hedonic theory predicts that house prices should rise as pollution levels decrease. However, environmental regulations may also affect labor markets, and thus housing demand. Employing a difference-in-differences framework, we find that house prices shifted up in the regulated areas with low manufacturing intensity, whereas in the areas with high manufacturing intensity, housing markets were weakened. We also find that in high-manufacturing-intensity areas, loan application volume declined, rejection rate augmented, and the probability of loan default increased.

The reallocative and heterogeneous effects of cap-and-trade

This paper explores the heterogeneous response of manufacturing firms to the NOx Budget Trading Program (NBP), a large scale cap-and-trade program that was implemented in nineteen states in 2004. Specifically, we examine the differential effect of the program across firms of different ages and sizes. Results show that while overall employment in polluting industries declines, this decline is driven entirely by incumbent firms and that new firm activity increased following the NBP. The findings provide evidence that, unlike command-and-control programs, cap-and-trade results in reallocation of production from older to younger firms and changes the firm size distribution.

The Effect of Air Pollution on Criminal Activities: Evidence from the NO<sub>x</sub> Budget Trading Program

The Effect of Air Pollution on Criminal Activities: Evidence from the NO<sub>x</sub> Budget Trading Program

Environmental Regulation as a Double-Edged Sword for Housing Markets: Evidence From the NOx Budget Trading Program

We investigate the effects of environmental regulations on housing markets using a quasi-experiment—the NOx Budget Trading Program (NBP). Hedonic theory predicts that house prices should rise as pollution levels decrease. However, environmental regulations may also affect labor markets, and thus housing demand. Employing a difference-in-differences framework, we find that house prices shifted up in the regulated areas with low manufacturing intensity, whereas in the areas with high manufacturing intensity, housing markets were weakened. We also find that in high-manufacturing-intensity areas, loan application volume declined, rejection rate augmented, and the probability of loan default increased.

Who Loses under Cap-and-Trade Programs? The Labor Market Effects of the NOx Budget Trading Program

This paper tests how a major cap-and-trade program, known as the NOx budget trading program (NBP), affected labor markets in the manufacturing sector. The cap-and-trade program dramatically decreased levels of NOx emissions and added substantial costs to regulated firms. Using a triple-differences approach, I examine how labor markets adjusted in manufacturing industries that were exposed to the program. I find that overall employment in the manufacturing sector dropped by 1.3%, with energy-intensive industries losing up to 4.8%. Employment declines are shown to have occurred primarily through decreased hiring rates rather than increased separation rates, thus mitigating the impact on incumbent workers. Young workers experienced the largest employment declines, and earnings of newly hired workers fell after the regulation began.

The NOx Budget Trading Program, Air Pollution, and Criminal Activities

The NOx Budget Trading Program, Air Pollution, and Criminal Activities

The Effect of Air Pollution on Criminal Activities: Evidence from the NO<sub>x</sub> Budget Trading Program

This paper examines the impacts of air pollution on criminal activities by exploiting three dimensions of variations in a rich quasi-experiment: the NOx Budget Trading Program. This program has been well documented to decrease NOx emissions and ozone concentrations in participating states. Employing a triple-difference estimator, we find robust evidence that the cap-and-trade market statistically significantly reduced violent crimes in participating states, whereas property crimes were less affected. Instrumental variable estimates suggest that lowering pollution emissions may play an important role in reducing violent criminal behaviors.

Improving NOx Cap-and-Trade System with Adjoint-Based Emission Exchange Rates

Cap-and-trade programs have proven to be effective instruments for achieving environmental goals while incurring minimum cost. The nature of the pollutant, however, affects the design of these programs. NO(x), an ozone precursor, is a nonuniformly mixed pollutant with a short atmospheric lifetime. NO(x) cap-and-trade programs in the U.S. are successful in reducing total NO(x) emissions but may result in suboptimal environmental performance because location-specific ozone formation potentials are neglected. In this paper, the current NO(x) cap-and-trade system is contrasted to a hypothetical NO(x) trading policy with sensitivity-based exchange rates. Location-specific exchange rates, calculated through adjoint sensitivity analysis, are combined with constrained optimization for prediction of NO(x) emissions trading behavior and post-trade ozone concentrations. The current and proposed policies are examined in a case study for 218 coal-fired power plants that participated in the NO(x) Budget Trading Program in 2007. We find that better environmental performance at negligibly higher system-wide abatement cost can be achieved through inclusion of emission exchange rates. Exposure-based exchange rates result in better environmental performance than those based on concentrations.

Impact of NOx emissions reduction policy on hospitalizations for respiratory disease in New York State

To date, only a limited number of studies have examined the impact of ambient pollutant policy on respiratory morbidities. This accountability study examined the effect of a regional pollution control policy, namely, the US Environmental Protection Agency's (EPA) nitrogen oxides (NO(x)) Budget Trading Program (NBP), on respiratory health in New York State (NYS). Time-series analysis using generalized additive models was applied to assess changes in daily hospitalizations for respiratory diseases in NYS after the implementation of the NBP policy. Respiratory end points in the summers during the baseline period (1997-2000) were compared with those during the post-intervention period (2004-2006). Stratified analyses were also conducted to examine whether health impacts of the NBP differed by socio-demographic, regional, or clinical characteristics. Following the implementation of EPA's NBP policy, there were significant reductions in mean ozone levels (-2% to -9%) throughout NYS. After adjusting for time-varying variables, PM(2.5) concentration, and meteorological factors, significant post-intervention declines in respiratory admissions were observed in the Central (-10.18, 95% confidence interval (CI): -14.18, -6.01), Lower Hudson (-11.05, 95% CI: -16.54, -5.19), and New York City Metro regions (-5.71, 95% CI: -7.39, -4.00), consistent with wind trajectory patterns. Stratified analyses suggest that admissions for asthma, chronic airway obstruction, among those 5-17 years old, self-payers, Medicaid-covered, and rural residents declined the most post-NBP. This study suggests that the NO(x) control policy may have had a positive impact on both air pollution levels statewide and respiratory health in some NYS regions. However, the effect varied by disease subgroups, region, and socio-demographic characteristics.

Response of ozone and nitrate to stationary source NOx emission reductions in the eastern USA

Abstract This study is an assessment of the impact of reduced stationary source NO x emissions on ground-level concentrations of ozone (O 3 ) and dry-NO 3 (HNO 3(g) + NO 3 − (p) ) in the eastern United States (EUS). Total anthropogenic NO x and VOC emissions have declined 32% and 20%, respectively, from 1997 to 2005 in the 20 eastern states participating in a NO x Budget Trading Program (NBP). Annual and ozone season (OS) NO x emissions from electric generating units (EGUs) have declined 48% and 66%, respectively, in the EUS. From 1997–1999 to 2006–2008 measured decline in meteorologically adjusted (met-adj) daily maximum 8-h (dm8h) O 3 , has been 8 ppb or 14% for the EUS during the May–September OS, with the largest declines occurring in the highest concentration category (99th percentile). Random coefficient models, with NBP and Acid Rain Program (ARP) regulated NO x emissions as the independent variable, show highly significant relations ( p ≤ 0.0001) to dm8h O 3 for 1997–2008 during the OS. Regional declines within the EUS range from 11% to 16%. The patterns of the O 3 trends are in general agreement with other recent studies. Rural and urban sites both show similar levels of decline from pre- to post-NBP periods. Dry-NO 3 during the OS shows a substantial decline from 3.1 to 1.8 μg NO 3 m −3 . Random coefficient models show regional results ranging from 32% to 39% declines, and measured results show a 35–46% decline in dry-NO 3 from 1997–1999 to 2006–2008. These results suggest that regulating NO x emissions has been highly effective in reducing both ozone and dry-NO 3 concentrations during the OS. Overall, a 32% reduction in total annual anthropogenic NO x emissions from 1997 to 2005 has been accompanied by a 7–8 ppb, or 12–13% decline in OS dm8h O 3 concentration, and a 34% decline in dry-NO 3 concentration in the 20-state NBP region. Model results indicate a 50% further reduction in NBP regulated NO x emissions will reduce O 3 concentrations an additional 3–5% and dry-NO 3 concentrations by 13–16%.

The effect of cap-and-trade programs on firms’ profits: Evidence from the Nitrogen Oxides Budget Trading Program

Cap-and-trade programs have become an increasingly common means of regulating emissions from electric power plants, but there is little empirical evidence about the programs’ effects on regulated firms’ profits. This paper uses stock prices to estimate the change in expected profits under the Nitrogen Oxides Budget Trading Program (NBP). Using regional variation in compliance costs, I find that the NBP reduced expected profits by as much as $25 billion, primarily affecting the values of coal generators that operate in states with restructured electricity markets.

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